Industrial Development

Spain's rapid industrial development dates from about 1960, but the underlying structure that made it possible resulted from a concerted effort by the government to reconstruct and to modernize the economy after the destruction caused by the Civil War. In the initial post-Civil War period of the early 1940s, the immediate need was for economic self-sufficiency because World War II had disrupted international trade patterns. After the war, most of the rest of Western Europe faced reconstruction problems, which left little surplus foreign capital for Spain. In addition, a political and economic boycott by the victorious Allies, the result of Franco's pro-Axis leanings, left Spain dependent on its own resources. The result was the slow, forced development of a diversified industrial sector, which would not have been economically justified if Spain had been able to trade freely with its neighbors. The high operating costs, the low rate of exports, and the inflation that consequently befell the Spanish economy made the 1940s a difficult period for the country.

In the 1950s, Spain, which had not been an original participant in the Marshall Plan, received considerable aid from the United States as part of a military basing agreement signed in 1953. Industrial development subsequently became more rapid, but it was still hampered by the country's continued isolation from the more quickly recovering economies of Western Europe. Inflation, fairly well under control in the rest of Europe, was rampant in the 1950s, and foreign exchange reserves declined because of Spain's continuing inability to export its products.

The turning point for the economy, particularly for its industrial sector, occurred in 1959, when a stabilization program went into effect. This program marked the end of Spain's economic isolation. Its outmoded system of multiple exchange rates was abandoned, and the peseta was devalued by 42.9 percent. Import duties and quotas were progressively lowered or removed, and exports were encouraged by subsidies, export credits, and other promotional efforts. The result of these initiatives was the structural transformation of Spanish industry during the 1960s. The manufacturing sector grew in real terms at an annual rate of 10.3 percent between 1958 and 1969. This growth was led by the motor vehicle and the chemical industries, both of which were stimulated by foreign capital and technology. The annual growth rates of these two key sectors were 24 and 14 percent, respectively. In the same period, labor productivity grew by nearly 8 percent per year.

Both domestic and export demand significantly contributed to the industrial growth of the 1960s and the early 1970s. The export of manufactures rose from 43.5 billion pesetas in 1960 to 191 billion pesetas in 1973, or from about 30 to 63 percent of the country's total manufacturing output.

The slowdown of the world economy caused by the increase in oil prices in the 1970s began to affect Spain in the second half of 1974. Unique among Spain's major industrial sectors, mining had been in trouble even before the price hike. It had continually experienced the slowest rate of growth during the period of expansion, and it reached its high point relatively early, in 1972. Construction was affected by the oil crises because of its relation to the booming tourist trade, which also suffered reverses in 1974. Within the manufacturing sector, textiles were particularly hard hit, and both the automobile and the shipbuilding industries faced reduced sales and cancellations. Rapidly rising unemployment and continuing inflation also indicated that the boom in Spain's industrial growth had stagnated.

The economic boom of the 1960s and the 1970s had left Spain with a large steel-producing capacity and had made it into one of the world's largest shipbuilding nations. By the mid-1970s, both of these industries experienced a production capacity glut as a result of sharply reduced global and domestic demand. Industrial retrenchment, however, was postponed during the 1970s. Sheltered to some degree from the first oil price shock by a cut in taxes on oil products--and cushioned by a high inflation rate, the persistence of negative interest rates, and protectionist tariff barriers--steel, shipbuilding, and other heavy industries continued their heavy investment in new capacity despite the downturn in world demand and the increasingly competitive international environment. Excess capacity in these industries coincided with rapidly rising labor costs and, as a consequence, with reduced competitiveness and profit margins.

One of the by-products of the country's economic difficulties was a sharp reduction in industrial employment. In addition, the 1980 recession finally forced the government to permit Spanish oil prices to rise toward world levels, while interest rates declined.

The first attempt at industrial restructuring was embodied in a 1981 law dealing with industrial reconversion. It proved difficult to implement, and a large part of the funds allocated for reconversion was siphoned off to cover losses among publicsector industrial companies. A more concerted attack was launched in 1983. The following year, a white paper on reindustrialization was issued, followed by a new law, the aims of which were to raise productivity and to restore industrial profitability by downsizing in order to restructure financial liabilities and to eliminate excess capacity and overmanning. To counterbalance these cutbacks, investment was directed toward new technologies for use in sectors that showed promise for greater growth and profit potential.

Development and expansion were encouraged in such industries as food processing, consumer electronics, defense systems, and other "growth" sectors. The industrial reconversion program was accompanied, however, by considerable worker discontent and by violent incidents. The initial financial costs of the program were high, but over time they were expected to yield considerable benefits.

By the mid-1980s, the economy had begun to emerge from a prolonged period of stagnation and crisis. The GDP commenced its expansionary growth, rising by 2.3 percent in 1984 and by a high of 4.7 percent in 1987. Meanwhile, industrial output had succeeded in shedding its sluggishness and had embarked on a vigorous cycle of growth. Industrial production grew by 0.9 percent in 1984, by 2.2 percent in 1985, by 3.5 percent in 1986, and by 4.7 percent in 1987. Observers projected that output would somewhat decrease in 1988 and in 1989, but that it would reach growth levels of 3.8 and 3.7 percent, respectively, in these years. Despite a modest decline in the mid-1980s, Spanish economic and industrial growth continued to be the strongest in Western Europe. Indicating an expanding economy, capital goods production increased by 9 percent in 1985, despite a previous decline in 1984. In the manufacturing sector, metal fabrication and the production of precision instruments increased from 1.8 percent in 1984 to 4.1 percent in 1985. Nevertheless, production increases in minerals and in chemicals were a minimal 0.2 percent in 1985, compared with 3.3 percent in 1984. Auto assembly output soared, but iron and steel production and shipbuilding experienced sharp declines. Traditional export-oriented activities, such as petroleum refining, and textile, shoe, and leather production were suffering from reduced competitiveness.

In what probably would turn out to be the peak of the economic boom, all major economic sectors posted healthy production gains in 1987. In the wake of renewed investment demand, construction grew by an estimated 10 percent, and overall industrial growth was 4.7 percent.